Answered Essay: Does interest expense recognized during an accounting cycle affect the balance sheet? If not, briefly explain why. If yes, briefly explain how.

Does interest expense recognized during an accounting cycle affect the balance sheet? If not, briefly explain why. If yes, briefly explain how. 4.

Does interest expense recognized during an accounting cycle affect the balance sheet? If not, briefly explain why. If yes, briefly explain how.

Expert Answer

 

Yes interest expense recognised during an accounting cycle affect the balance sheet.

First of all interest expense reduces the net income which in turn reduces the retained earnings and thus reduces the overall shareholder’s equity in case of a corporation , if it is a sole proprietorship , then it reduces the owner’s capital.

Secondly , if the interest expense is paid in cash , then it reduces the cash on the asset side of the balance sheet and if it is not paid in cash and treated as liability ( interest payable ) , then it increases the current liability on the face of balance sheet.

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